Category Archives: Tyler Cowen is my Favorite Blogger

Disaggregating the polity: frontier culture

Posted on by

[UPDATE: clarifying definitions. In the paper below, the frontier is by definition very sparsely settled. Also, “Greater Appalachia” as Woodard uses the term describes the Scots-Irish who gradually spread westward, not simply people born in what we now call Appalachia]

Samuel Bazziy, Martin Fiszbeinz, and Mesay Gebresilasse write,

In our simple conceptual framework, the significance of the frontier can be explained by three factors. First, frontier locations attracted individualists able to thrive in harsh conditions. Second, the frontier experience, characterized by isolation and low population density, further promoted the development of self-reliance. At the same time, favorable prospects for upward mobility through effort nurtured hostility to redistribution. Finally, frontier populations affected local culture at a critical juncture, thus leaving a lasting imprint.

Pointer from Tyler Cowen.

My immediate reaction is to interpret this using Colin Woodard’s 11-nations model, in which he divides the U.S. into cultural sub-nations. The nation most likely to seek out the frontier would be Greater Appalachia. The other migratory nations that settled the west were Yankeedom, which was very community-oriented and would have avoided the frontier, and Midlands, which also preferred to live in towns or farming communities, rather than in isolated frontier settlements. The political and cultural description that Bazziy and co-authors give to frontier-influenced populations does seem to fit the Greater Appalachia Jacksonian model.

Equity without capital, twenty years later

Posted on by

I received a review copy of Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which has a 2018 copyright date.

1. My first reaction is to be a bit miffed that my name is not in the index. Nick Schulz and I wrote a book on the intangible economy, and the first edition appeared in 2009. Going back even further, in 1998 I wrote an essay called Equity without Capital. That essay is still interesting to read, and it anticipated some of the central issues in their book. But probably fewer than 200 people saw it when I wrote it.

2. Hal Varian and Carl Shapiro aren’t in the index, either. That is a less forgivable omission. Information Rules sold well.

3. I hurried through the book, and I was inclined to give it a mixed review. But when I re-read it, I only re-read the sections that I liked the first time. I decided that those sections are really good. Now I am inclined to give the book a strong recommendation.

4. The organization of the book is excellent. The good news is that you usually can skip to the end of the chapter and read its conclusion to get the main point. The bad news is, well, why not just condense the book into an extended essay? And if you left out the sections of the book that did not do much for me, the extended essay would work even better.

Gosh, I am really being hard on them, for some reason. It really is a first-rate book. I’m not sure why I keep wanting to talk about what I don’t like about it. But, here I go again:

5. They make a big deal about recent literature that arrives at measures of intangible capital. However, as they point out, such measures are fraught.

Their analysis says that intangible capital has four s’s: sunk costs (investments in assets that cannot be re-sold); scale (network effects and path dependency can bring very high returns); synergies (combinations of ideas are worth more than the ideas are worth separately); and spillovers (ideas are easily copied or imitated).

This implies, as they recognize, that intangible capital can be worth much more than what it costs to obtain, because of scale and synergies. But it can be worth much less than what it costs to obtain, because of sunk costs in non-marketable assets. In bankruptcy, you can sell off the office furniture and the fleet of trucks (tangible assets), but not the business process that proved unsustainable or the failed attempt to establish a brand (sunk costs).

But the measures of intangible capital use acquisition cost as the measure of investment in intangible capital. That may be a reasonable way to value tangible capital. But to me, their four s’s imply that intangible capital’s value cannot be reliably represented by its acquisition cost.

To get technical, Tobin’s q is the ratio of the market value of capital to its replacement cost. Think of it as the ratio of the stock price of a firm to the acquisition cost of its assets. For tangible capital, q should be close to 1. But for firms with a lot of intangible capital, like The Four, it is much, much greater than 1. Tyler Cowen’s recent column, Investors are celebrating the tech revolution, says that the current high values of q are a positive signal about future economic growth.

Of course, for many dotcom stocks in the 1990s, q shot way up before dropping to zero, which is what my essay was predicting. But by the way, one of the stocks I was skeptical about back then was Amazon, and if you held onto that, the losses on the rest of your 90’s doctcom portfolio might not trouble you.

Looking at this balance between superstar value and failure, the authors propose that, well, on average, the value of intangible capital for the whole economy ought to be somewhere close to what it costs. I thought they were just hand-waving at that point.

They understand well enough that intangible capital is not exactly like tangible capital in the neoclassical model. But I do not think that they are ready as I am to take the next step and jettison the neoclassical framework.

Organizing the causes of the Industrial Revolution

Posted on by

Mark Koyama writes,

Consider some prominent views about what caused the British Industrial Revolution. At the risk of grossly simplifying matters we can put them into three bins.

…Third, there are those who argue that ultimately only innovation can explain the transition to modern economic growth. This is the position of the majority of economic historians. Label them group 3. However, this third group is divided between those who seek to explain the increase in innovation in purely economic terms (3a) and those who see this as an impossible task and argue that the answer has to be sought elsewhere, perhaps in something that can be broadly defined as culture (3b).

Pointer from Tyler Cowen. The essay is about whether Rome could have had an industrial revolution. Recommended.

The O’Reilly Cycle

Posted on by

One of the ideas in Tim O’Reilly’s new book is about a cycle in technology. I describe it this way.

Phase 1: a new hardware platform opens up (personal computers in the late 1970s; the Web in the mid-1990’s’; smart phones in this century) Lots of entrepreneurs try to play with it, figure out what to do with it.

Phase 2: competition to become a dominant infrastructure player within the platform: operating systems in personal computers (came down to Windows vs. Mac); the Web portal (came down to Google vs. AOL vs. Yahoo); capturing user attention in mobile phones (still up for grabs, I think, but with Facebook and Twitter as prominent examples today). In this phase, being more “open” is a competitive advantage. Having a bigger ecosystem of other people adding value to your platform is the winner. For example, Google won because it did the best job of incorporating the entire Web into its ecosystem. Amazon has opened its platform to just about any seller.

Phase 3: cannibalization. The winner in phase 2 decides that its revenue has maxed out in just being an agnostic open platform, so it starts to take over profitable niches within the ecosystem. Microsoft creates Excel. Google captures ad revenue from content providers. In some sense, the winner in phase 3 backs away from the “open” strategy and instead tilts the playing field to favor its own offerings in the most profitable areas. But cannibalizing your ecosystem helps to drive ambitious entrepreneurs to move on to the next hardware platform, where they can have more opportunity.

There is a widespread perception that Apple, Facebook, Google, and Amazon are moving to the cannibalization phase. For example, Amazon is creating some of its own brands. Along these lines, commenter Handle and Tyler Cowen recommend this piece by Andre Staltz. I recommend it, also, and I plan to post on it after I read it again.

Provocative sentences about information overload

Posted on by

From James Williams, in an interview by Brian Gallagher.

What’s happened is, really rapidly, we’ve undergone this tectonic shift, this inversion between information and attention. Most of the systems that we have in society—whether it’s news, advertising, even our legal systems—still assume an environment of information scarcity. The First Amendment protects freedom of speech, but it doesn’t necessarily protect freedom of attention. There wasn’t really anything obstructing people’s attention at the time it was written. Back in an information-scarce environment, the role of a newspaper was to bring you information—your problem was lacking it. Now it’s the opposite. We have too much.

Pointer from Tyler Cowen.

Think of this as an environment that rewards the most clever spammers.

Helpful sentences on Bitcoin

Posted on by

From Adam Ludwin:

crypto assets are a new asset class that enable decentralized applications.

…A decentralized application is a way to create a service that no single entity operates.

…bitcoin, for example, isn’t best described as “Decentralized PayPal.” It’s more honest to say it’s an extremely inefficient electronic payments network, but in exchange we get decentralization.

…in order for decentralized applications themselves to have utility to some cohort, that cohort must be optimizing for censorship resistance.

Pointer from Tyler Cowen. Unlike almost everything else I have come across talking about Bitcoin, Ludwin’s whole post made sense to me.

My recent reading

Posted on by

1. The Captured Economy, by Brink Lindsey and Steve Teles. I don’t think I have much more to say about it than what I wrote here.

2. How to Think, by Alan Jacobs. The topic of political emotionalism is something of a well-squeezed orange these days, at least among people who are not too overcome with political emotionalism to be disturbed by it. Jacobs gets some juice out of the orange, and I have drafted an essay that uses his book as a jumping-off point. I particularly like his emphasis on thinking as a social phenomenon, and the way that he works through what that implies.

He emphasizes that that he straddles two separate worlds–religion and the academy, and he thinks that this helps with being able to empathize with different points of view. I can remember at a very early age feeling that I straddled two separate worlds. In 4th and 5th grade, my street in suburban St. Louis was white trash* (except for my college professor father), but some of the other streets that fed my elementary school were middle-class professional. The children were very different, and I was one of the few kids with friends of both types.

*You might think I’m exaggerating. But there was a lot of fighting and roughness among the kids, and even among the adults. The most dramatic incident was when Steve Stella’s mom grabbed a woman by her hair and banged her head against the curb. That’s not the sort of thing that middle-class kids encounter these days. (No, Steve Stella is not anyone famous, or anyone I’ve kept track of. I feel free to use his name on the theory that he did not grow up to be anyone you know.)

3. Economics for the Common Good, by Jean Tirole, a review copy of which was sent to me. At close to 500 pages of translated-from-French prose, this will not be an easy one to get through. So far, the main thing I have against it is the title. Something like “What economics can do for public policy” would go down more easily. I’ll let you know more when I am done–not necessarily finished–with the book.

4. The Second World Wars, by Victor Davis Hanson. This not for a WWII neophyte, since it offers no chronology. Nor does it offer the currently popular “how it looked to the ordinary grunt” perspective (at least so far–I am not finished reading). The book is primarily a vehicle for the author to offer his opinions about why things played out as they did.

He is unfashionably Anglophilic. Also, he emphasizes the industrial might of the United States and the Soviet Union. This in turn leads him to attribute the Axis defeat to the folly of Hitler’s choice to invade Russia, Japan’s attack on Pearl Harbor, and Hitler’s decision to declare war on the U.S. Interestingly, I skimmed through the chapter on Pearl Harbor in Churchill’s third volume, and it makes no mention of Hitler’s decision to declare war. It reads as if Pearl Harbor automatically put the U.S. in the war against Germany.

VDH provides provocative and credible evaluations of the cost-effectiveness of various military tools. American submarines and Soviet tanks receive high marks. Paratroops and battleships receive low marks. He argues that Britain and the U.S. learned from mistakes and improved tactics and machinery (such as faulty torpedoes on American submarines when the U.S. first entered the war) more quickly than did their enemies.

Recommended for World War II buffs. Also, after I wrote this post but before I scheduled it to appear, Tyler Cowen reviewed the book very enthusiastically.

The Cowen-Cochrane dispute on banking

Posted on by

You can start with Tyler, and work backwards.

I don’t think it is easy to get around having a part of the economy which is both systemically risky, and also debt-intertangled, as the evolution of shadow banking over the last fifteen years seems to indicate.

As spelled out in Specialization and Trade, my simple account of financial intermediation is this.

1. We start with a risky investment, fruit trees, and it is costly to observe how the fruit trees are doing and how much skill and dedication the entrepreneur is contributing.

2. It helps to finance these fruit trees in part with debt. This is not because debt is easier to trade than equity, but because it is a less expensive way to align incentives.

3. It helps to have a bank buy the debt and issue short-term, risk-free liabilities. This is because people do want to hold and exchange short-term, risk-free liabilities. An intermediary that backs the fruit-tree debt with a combination of bank equity and demand deposits makes people better off.

So I am afraid that I am with Tyler on this one.

The art of thinking reasonably

Posted on by

David Brooks starts out talking about Richard Thaler, but he moves on to recommend a forthcoming book by Alan Jacobs, called How to Think. Brooks writes,

Jacobs nicely shows how our thinking processes emerge from emotional life and moral character. If your heart and soul are twisted, your response to the world will be, too. He argues that by diagnosing our own ills, we can begin to combat them. And certainly I can think of individual beacons of intellectual honesty today: George Packer, Tyler Cowen, Scott Alexander and Caitlin Flanagan, among many.

My thoughts.

1. Read the column. It sounds as though Jacobs focuses on tribal dynamics. I expect his themes will overlap with my own Three Languages of Politics. The book will be tomorrow, and unless I am put off by perusing a sample or other reviews, I expect to read it.

2. Thaler’s focus, which is irrational (in the economic sense) individual choices, differs from Jacobs’ focus, which is how social context can influence us to have an unreasonable attachment to our opinions. In that sense, the Thaler opening is a head fake, and I think that the column would have been better without it.

What I’m Reading

Posted on by

Tim O’Reilly’s new book. He tries to grasp how technology affects the current business environment. He then proceeds to look at the overall economic and social implications. You can get some of the flavor of it by listening to his interview with Russ Roberts. And here is more O’Reilly, where he says,

Microsoft lost leadership because they had taken away the opportunities for their developer ecosystems, so those developers went over to the Internet and to Google. Now, we see this same thing playing out again.

I am not persuaded by these sentences. The Internet was quite a powerful phenomenon. I cannot envision an alternative history in which Microsoft does not lose a lot of its commanding position because of the Internet. You can make a case that Bill Gates could have positioned Microsoft better had he grasped the significance of the Internet sooner, but that would not have changed the game, only made Microsoft a more agile player. And you could argue that whatever Microsoft lost in terms of time, they made up for in terms of spending, so that they wound up doing about as well in the Internet environment as one could reasonably expect.

Overall, I disagree with O’Reilly quite a bit. Early in the book, he writes,

there are far too many companies that are simply using technology to cut costs and boost their stock price

Take this rhetoric and apply it to trade, and it could come from the lips of Donald Trump. In fact, good economists will explain that trade and technology are so intertwined as to be indistinguishable as economic phenomena. Austrian capital theory says that capital is roundabout production, i.e., roundabout trade. Suppose an economy consists of farm equipment and crops, and you want to explain its efficiency. Do you give the credit to farmers applying technology or do you give the credit to trade between the manufacturing sector and the agricultural sector? It’s the same phenomenon, just described differently.

Russ Roberts did not go after O’Reilly on the anti-corporate demagoguery. A charitable interpretation was that Russ wanted to focus on the Internet “platform model” that O’Reilly waxes eloquently about. A less charitable interpretation is that Russ switched to Tyler Cowen’s philosophy of interviewing.